Voices: Casey Weade, On Retirement Planning with Insurance

I’m 25 years old, and as a young financial adviser I see lots of pitfalls in traditional retirement plans. I believe financial advisers need to consider an alternative with great potential: A life insurance policy, with the parent as the insured and your client, the child, as the beneficiary. It’s a sure-fire pay-out. The client gets a guaranteed return on their investment.

My dad is 61 and healthy. I bought a $500,000 convertible term life insurance policy and designated him as the insured. I’m saving for a house and about to get married, so I don’t have a lot of extra income, but I can afford the $2,500 annual premium. If he lives until he’s 85, I will collect a death benefit on that policy when I’m 49 years old.

Admittedly, the percentage of return on the investment is an unknown, since it’s tied to the death of the insured. The rate of return is higher if the insured dies at 75, as opposed to if they live until 95. And unlike other retirement plans, such as 401(k)s or Roth IRAs, the money cannot be accessed until the insured dies.

However, it’s known for sure that there will be a pay-out. That’s guaranteed.

There are several factors that need to be considered before using this strategy. First, it’s important that the client has a strong relationship with their parent. Most people wouldn’t be comfortable having a million-dollar life insurance policy taken out on them if they didn’t love and trust their kid.

It’s also possible that the parent is not insurable at all, due to health problems. The rating of the insured person (based on age, health and earnings) is going to affect the plan’s premium rate and potentially reduce its benefits.

But if the parent’s health is good and their relationship with the child strong, this strategy can be an ideal way to insure a nest egg for the client’s retirement. I recommend clients take out a convertible term policy with a five-year conversion credit. When it gets converted to a long-term policy the amount already paid in premiums gets folded into the permanent policy and the annual premium payment is reduced.

There are even a few companies that offer a long-term care benefit built into the policy. That allows the client to use a portion or all of the benefit for long-term care for the insured, but it also benefits the client. If the parent has significant assets and needs long-term medical care, the life insurance policy’s long-term care benefit prevents those assets from being drained.

Another neat quality of this plan is the ability to create a legacy for every generation. When the client’s parent dies and they get the death benefit, the client could use a portion of the pay-out to buy a new life insurance policy on themselves, naming their kids as beneficiaries. The plan can just keep rolling down the generations.

Using life insurance as a component of retirement planning provides a guaranteed element that is almost impossible for a young person today to find any other way.

Comments (5 of 12)

It isn't as terrible an investment as some are making it out to be. Obviously, as the author states, this is not a stategy for everyone. However, if you think about this logically, it is only slightly different than the accepted norm. Life insurance is usually bought by someone who wants to provide financial security to their family. However, many times I work with people who cannot afford as much life insurance as they would like. Why not have the children pay for some of the premium, seeing as they are the beneficiaries? If buying a life insurance policy on my father is greedy and immoral, is it greedy and immoral for funeral homes to profit when he dies? Are estate taxes greedy and immoral? I don't want my father to die, we have a great realtionship. His life has had a hige positive impact on my own life. He is my biggest role model. What is wrong with his death also having a positive impact on my life. I would rather be able to look back on his final days and remember the security he left me and my family, than a stack of sympathy cards, and a larger stack of bills, and a dozen caseroles made by our friends and loved ones.
A whole life policy written by a solid company has a cash value, that will equal the premiums paid in after a certain period of time. That is guarenteed, and agents are able to illustrate that to their clients before the sale is made. Also a whole life policy can be written so that the death benefit increases over time. This is done by having the dividends of the cash value purchase more life insurance. It might make some people uncomfortable, and I wouldn't always recommend the children approaching their parents, but I don't see anything wrong with the parents approaching their children about it.
I'll say it one more time, this isn't for everyone, but I know that as I get older I will ABSOLUTELY approach my children with this idea.

12:50 pm October 26, 2011

Not a good investment wrote :

This is a lousy investment. Let's face it, it's totally illiquid until the insured dies. In addition, the rate of return is only attractive if the insured dies many years prior to life expectancy. In the investment world, you should target considerable rate of return premium for lack of liquidity as you do in other illiquid investments. With life insurance, you'll likely get sub market returns at best if the client lives long enough and decades of illiquidity. In addition, you risk losing 100% of your investment if you run into financial hardship and can't make the premium payments.

3:36 pm October 25, 2011

ah.. but he used the word 'guarenteed' wrote :

i also didn't say insurance wasn't fine for retirement (though, it is very similiar to investing in the stock market (for VUL) or the bond market (Whole Life, UL, etc..)).

It's the buying of life insurance on your parents that's the issue.

8:57 am October 25, 2011

As a Current Advisor wrote :

Of course there is no guaranteed return, just as there is no guaranteed return in the stock market! At least there is a guarantee of principal, which you do not have in the stock market!

Risk to insurance company default - Pick highly rated company and do your research, just as you do when you buy your stocks. You're a CFA, you should be able to figure this out.

Risk due to inflation - Don't put all your money in one place!

Risk due to parent living past life expectancy - Adjust policy premiums later in life!

Liquidity Risk - Again, don't put all your eggs in one basket!

This type of retirement planning absolutely has its place in a retirement plan. And as the author said, "Using life insurance as a component of retirement planning..." This is not an end all solution, it is something that could possibly be used as a COMPONENT of the retirement plan.

The stock market isn't the only solution to retirement planning.

4:29 pm October 24, 2011

oh... and.. no guarenteed return and where does he discuss risks.. wrote :

Where is the guarentee for a specific return? Answer... there is none.

As for some risks that should be considered (off the top of my head):

Risk to insurance company default
Risk due to inflation
Risk due to parent living well past life expentency
Risk due to parent outliving child
Liquidity Risk - Ex.You need money 5 years from now

- a former advisor & CFA

The WSJ should remove this post and replace it with good advice.

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